Reference Pages

Friday, October 30, 2009

Wells Fargo Energy Capital granted Cubic Energy another month to refinance its debt. Back in June, Wells informed Cubic that it had "redetermined its borrowing base." That's finance speak for pulling a portion of Cubic's debt, in this case reducing the amount Cubic could borrow from $20 million to $7.5 million. Since the money was already borrowed, Wells gave Cubic time to find a solution to repay the loan to the revised lower level rather than throwing the company in default. So far, deadlines of September 1, October 1 and now November 1 have passed without resolution, so Wells has granted Cubic until December 1 to fix the situation.

The company is still looking at a year end deadline to justify its AMEX stock listing.

Noble Energy is a relatively small player in the Haynesville Shale, with 17,000 gross acres, but it has a big presence on the international stage, with many of its projects located offshore. The company recently reported its first successful Haynesville horizontal well, the Mary Harris #1 in southwest Shelby Co. Texas, which IP'd at 12.6 MMcf/day. Its second well should report before the end of the year.

Noble has leases in the Caspiana Field of Louisiana, where it is a minority partner) and in Texas, where it is a 60% partner with Petrohawk (although Petrohawk is the operator on the first four wells - is Petrohawk teaching Noble how to drill shale???). The map below shows the location of Noble's acreage.

The company is participating in two rigs, one each in Louisiana and Texas. Once Noble has the chance to sift through the data on its first few Haynesville completions, it will assess its level of capital commitment to the play.

The Baker Hughes rig count showed a relatively big jump (+21) in U.S. rigs this week, but most of the rig increase came from oil (+18) rather than gas rigs (+3). The one trend that continues is the move to horizontal drilling (+25) at the expense of vertical rigs (-5) (there was one new directional rig this week).

In the Haynesville Region of E. TX and N. LA, inclusive of other fields, the count was up by two, +2 in E. TX and -1 in N. LA.

I read an interesting article last week in the Denver Post about the recent phenomenon of electric power generators using more natural gas than usual over the past few weeks. Of course the reason is the depressed price of gas. But the article gets into more of the "whys" of the switch.

One thing the article pointed out is that power generators buy 90% of their coal through one to two year fixed contracts. Since power generation is about the only customer for coal these days, it leads to less short-term price volatility, but it can lead to big swings as the pricing power swings between the customer and the producer. Producers buy about half of their natural gas supplies on the spot market. Over the summer, spot gas was cheaper than coal on an equivalent energy output basis, so many electricity producers used less coal and bought more gas. Unfortunately for the power generators, the coal contracts are pretty much set, so the hoppers of coal keep coming. As a result of the partial switch to gas and the lessened use of electricity in the recession, the power generators are left with huge stockpiles of coal. As the chart below shows, stockpiles at power generation facilities are much higher than they have been for the past five years.

Electric Power Coal Stocks, Jan. 2006 - July 2009

Unfortunately the data from the EIA is only through July 2009, which was before the spot price of gas really plummeted. To try to look forward a couple of months, I took the EIA coal stock data for the past two years and compared it with the average monthly Henry Hub spot price for natural gas on the chart below to see if there was any visual correlation.

As the chart shows, a correlation appears once the spot price for gas drops. This quickie analysis points to another month or two of rising coal stockpiles, but it also shows the temporary nature of this fuel switch, also pointed out in the DP article. Once gas prices start their seasonal rise as gas storage begins to deplete, the power generators likely will switch back and start whittling down their mountains of stockpiled coal. If, however, natural gas production increases from shale keep the spot price of gas low or if Congress passes a meaningful carbon reducing energy policy, coal producers might be in for a tough time when it comes time to renegotiate supply contracts with power generators.

OK, this is my last post from El Paso Corp's analyst event, but I couldn't pass it up. I'm fascinated by the geology of the Haynesville Shale, how it used to be a depository for organic material from rivers 150 million years ago. On this site, I like to show the different takes on the geology of the play. I especially like the first El Paso slide below, which marries a map view with a cross section. It is one of the few images that successfully illustrates what is going on beneath the surface to non-geologists like me.

When I was in high school I worked summers at a geology and petroleum engineering consulting firm. One of my more tedious tasks was to catalog the thousands and thousands of blueline Schlumberger log reports. Those logs were folded accordion style and could be longer than 20 feet. I used to write the S/T/R numbers on the special small file folders and then file them in the appropriate drawer. I have a vivid memory of the geologists sitting in their offices poring over those reports with a red pencil in one hand circling particular jagged lines that caught their attention as they flipped the folds. I was always fascinated that they could see important data in all those lines. It just looked like static to me. It still does. I'm just glad images like those below mean something to those geologists.

Last week, I noted a great presentation by El Paso Corp. for an analyst site visit. As a non-industry person, I found the slides about how the company completes wells. The amount of time, effort and equipment is significant. I would have liked to be there to hear the explanations, but the visuals help a lot.

Last week, Cabot Oil & Gas held its quarterly earnings call and updated the market on its progress in the Haynesville Shale. The company has 61,000 gross acres (32,000 net) but is mostly piggybacking on other operators for its initial horizontal drilling operations.

In its most recent announcement, Cabot touted its first horizontal well, operated by Common Resources, in the County Line Field that has an initial production rate of 21.0 MMcf/day at a flowing casing pressure of 7,800 psi. The IP rate was stated at eleven days, but it might have been a peak rate - the relase was unclear. The release and the conference call were a little short on specifics. The well was not named (we'll find out eventually), nor was the exact location specified (based on a map from an earlier Cabot presentation, the new well should be "AMI #1" which is located in San Augustine Co.). The well cost approximately $10 million and had 14 frac stages.

Common Resources has completed a couple of big wells in San Augustine Co. over the past few months, Red River 164 #1 (13.4 MMcf/day, reported in August 2009) and Red River 619 #1 (16.7 MMcf/day, reported October 2009). I'm not sure if the second of these wells is the one Cabot refers to or if it is another one. Unfortunately, Common Resources is a private company and is not compelled to release lots of specifics.

Cabot, with a partner, has completed a second well ("AMI #2" above) but the company did not release results, and a third well will be spud in December. The company is planning five Haynesville Shale wells in 2010.

Daniel Yergin, acclaimed author of The Prize: The Epic Quest for Oil, Money & Power and chairman of IHS Cambridge Energy Research Associates, is in the process of revising his landmark history of oil. He also recently published an interesting article in Foreign Policy magazine about the state of oil in the world. I took the article as a preview of the changes he is weaving into The Prize, showing how dramatically the world and the oil industry have changed since the book was published originally in 1991.

I also noted the interview below with Dr. Yergin from the CleanSkies.org web site. It covers many of the same points in the article.

Take a look at the article. It's a good read and is not as long as you might think. While my primary focus here at haynesvilleplay.com is natural gas, there is no avoiding oil, which has been the biggest player on the world energy scene for more the past century. Just as Keith Jackson used to say every January about the Rose Bowl, it's "the grandaddy of them all," and this article helps put the larger context of oil into perspective.

There have been rumblings from various sources over the past year that alternative energy, specifically wind and solar, should join forces with natural gas to each's mutual benefit. I read a short article about a speech Robert F. Kennedy, Jr. made at the Solar Power International Conference yesterday making this same point.

Kennedy suggests the pairing would help both parties, and I agree. Wind and solar need natural gas. No matter how much we spend on these alternative sources, they will always have the problem of intermittency, at least until better batteries or other energy storage mechanisms are perfected. Natural gas is a superior backup fuel to coal because natgas plants can fire up and shut down much more quickly than coal plants, and natgas is a hell of a lot cleaner than coal. The last thing alt-energy providers want to do is depend on dirty coal as a backup.

At the same time, natural gas needs alt-energy’s help because alt-energy is on the upswing in this country. It is much more popular than legacy energy sources, especially in Washington DC. Additionally, natgas has always been in the shadow of oil and coal. Nat gas needs to be independent. It sure does make a lot of sense for natural gas to hang around with the new popular kid at school, especially if the relationship benefits both parties.

Enterprise Products Partners and Duncan Energy Partners (a subsidiary of Enterprise) announced Tuesday that their jointly owned Acadian pipeline will expand into the Haynesville Shale. The HaynesvilleExtension will be 249 miles long and be comprised of 30" and 36" diameter pipe. It will have a 1.4 Bcf/day capacity and interconnect with the Enterprise's Acadian and Cypress Gas Pipeline systems to the south. The development calls for two compressor stations with a combined 67,000 horsepower. The pipeline is expected to be in service by September 2011. At first, it will connect to nine Haynesville producer locations in DeSoto and Red River Parishes.

The Enterprise/Duncan project is different from many of the new Haynesville takeaway projects in that it moves the gas to the south. Enterprise suggests that it would give its users access to "more favorable pricing points" in south Louisiana.

The weekly EIA natural gas in storage report came out this morning and it showed a 25 Bcf injection in storage facilities across the country, bringing the total amount of gas in storage to 3.759 Tcf. It's still an all time record, but this week's injection was about half of last year's amount (49 Bcf) and less than the five year trailing average (43 Bcf). As a result, the percentage differential over last year narrowed from 12.6% to 11.0% and for the past five years it narrowed from 13.8% to 12.4%.

I've gone on at length about Entergy's misguided plan to convert its Little Gypsy gas-fired power plant to coal and petroleum coke, an industrial byproduct. The concept made a certain amount of economic sense on the surface when it was proposed a while back, but it is a bad idea when you dig deeper. Why spend $2 billion to pollute our state when we are sitting on one of the world's largest supplies of natural gas? The plan was hatched years ago, before shale plays became economically feasible, but it still was not a good long-term plan.

The report concluded that while the Arctic region holds approximately 22% of the world's undiscovered conventional oil and gas reserves, the downside for the area is 1) it is mostly natural gas, which is hard to transport, 2) development be more costly, difficult and time consuming, 3) there are Arctic sovereignty claims that likely will delay development and 4) protecting the natural environment will be expensive. The report notes that perhaps the biggest issue impeding Arctic natural gas development is the emergence of enormous quantities of shale gas in the Lower 48 and other parts of the world.

An article yesterday from the Alaska Dispatch cited the report and the potential negative impact on the AGIA pipeline. It also had an interesting discussion of the impact of rising natural gas prices, suggesting that a spot market price over $6 might cause domestic producers to flood the market with pent-up supply, causing another price drop. Ultimately, it looks like the price of gas will stay relatively low for a few years to come until a significant upward shift in demand occurs.

The Dallas Area Rapid Transit board decided yesterday to solicit bids to replace 600 city buses with compressed natural gas (CNG) buses rather than pursuing diesel buses. There had been much debate over the past year, but the board decided to pursue CNG because of lower cost and less pollution. Not mentioned in the article is the support it provides to the regional natural gas industry.

The Henry Hub spot price has hung around in the $4.50's this week, closing at $4.57/MMBtul today. That's remarkable stability (only over three days, however) given the amazing price swings in the past month between $2.32 and $4.99.

Close of business today marks the beginning switch to the next month futures contract (from November to December), so the "NYMEX Futures" price suddenly jumped from around $4.29 this afternoon (still that price on the ticker to the right) to around $5.08 (at Bloomberg), but it still shows a loss of 4%. It should straighten out tomorrow.

Below are two slides from tomorrow's Questar earnings call. The first slide shows how the new acreage acquired in Bienville Parish changes the company's map to show a real emphasis there. The second slide shows progress on the company's wells to date.

While it's not directly related to the Haynesville Shale, I noted with interest an article in yesterday's New York Times that Chesapeake Energy succumbed to public pressure to not drill its New York Marcellus Shale leases located in the watershed for New York City. Ultimately, however, I think Chesapeake made the right decision.

A fairly big battle has been waged in the Marcellus Shale in the past few months over natural gas drilling and the potential impact to drinking water. The pressure was especially intense in New York City because the high quality of the city's water has allowed the city to defer billions of dollars in infrastructure improvements. Any damage to the watershed would have a huge negative economic impact for the city and the state.

Chesapeake's decision was very smart, both from a PR and an operating perspective. The lease in question only covers about 5,000 acres acquired through the purchase of Columbia Natural Resources a few years ago. Why would Chesapeake want to mess around with a tiny amount of lesser acreage in New York when it can invest its resources in more productive land in Pennsylvania?

The decision might embolden environmental and political activists in the fight against natural gas, but it might be the first step to a larger compromise. The states in the Northeast need companies like Chesapeake to develop the Marcellus Shale, especially in these tough economic times. Environmental protections are also important, at least psychologically, for the citizens. Ultimately there has to be a balance, but unfortunately a compromise might leave everyone unhappy.

Chesapeake is a headstrong company that hates to lose, but CEO Aubrey McClendon is smart enough give up a pawn to protect the queen.

Tuesday, October 27, 2009

In the Haynesville Shale, Questar has distinguished itself by turning a small acreage position (31,000 net acres) into some of the biggest producing wells in the play. Today, the company announced that it has acquired approximately 12,000 net acres, much of it in Bienville Parish adjacent to and north of its existing Woodardville acreage. This acquisition brings Questar's net Haynesville acreage to 43,000. (I'll post the map of the acreage when it comes available.)

The company announced also announced some completions. The well below was already reported by DNR:

Somewhere in the list of things I am not is movie critic, but just like a geophysicist who will opine on geopolitics, that won’t stop me. I’ll try to avoid any spoilers because I hope everyone has the opportunity to see the film, as it was very well done. Well shot, well edited and well written. The film professor on the panel after the showing said that it was one of the best documentaries she has seen for the past five years. Since everyone with a video camera is now a documentarian, the level of documentary quality has gone downhill. But “Haynesville” is a professionally made movie that is not to be confused with much of the dreck out there today. Bottom line: it is a very good film.

The story followed three individuals in different circumstances and showed how their lives changed over the course of about six months (watch the trailer for more on the specifics - I won't spoil it). The stories themselves were told objectively and they avoided many traps that would have made them predictable. The film used the development of a gas well from land clearing to initial production to help pace the story. (The well was called Grant #1, but I might have miswritten the name or it might go by another name because I can’t find any wells named Grant in state records.)

The film also included interviews with many experts in the areas of conventional and alternative energy. The production has a negative slant on coal. It doesn’t completely slam coal, but it also doesn’t offer an opposing position favoring coal other than the economic argument that the stuff is simply cheap. On the whole, you can tell the filmmaker has an opinion, as a documentarian probably should, but he doesn’t bludgeon the viewer with it. There is still enough room to have your own thoughts. As Gregory Kallenberg said in the discussion afterward, he wanted to show that “energy is complicated.” He did a good job of that.

I have to say that I was a little worried going in. Having watched the film trailer and processed it through my mental black box, I was expecting more of a melodrama that dwelled on negatives and attacked “The Man.” What I found was balanced and rather objective treatment of the development of the Haynesville Shale and how it fits into the big picture of energy, environment and geopolitics, all told through individual stories.

In terms of clarifying complicated concepts, the film did a great job. There were superb graphics and good explanatory notes. I might quibble with some of the numbers and descriptions used, but the general points were well explained.

One area that I wish the producers had explored more deeply in the film is the technology and expertise behind shale drilling. I realize you can’t put everything in a documentary, but viewers will not walk away understanding just how complex and expensive it is to extract gas from shale. They may be no dry holes in the Haynesville Shale, but the process of getting the gas out of the hole is not to be underestimated. I think this omission led to some misconceptions from the audience that this is Jed Clampett-easy (one of which is discussed in a separate post).

The panel discussion afterwards was also enlightening and brought up some interesting issues. Perhaps the most interesting concept came from political scientist Christopher Fettweis, who talked about the “resource curse.” This is an international phenomenon where countries that are resource rich end up worse off because wealth and power ends up in the hands of the few at the expense of the many. This is a cautionary tale for Louisiana, which has a history of squandering energy wealth at the expense of its population.

Prof. Fettweis mentioned Norway’s experience with North Sea oil wealth. When oil was discovered off the coast of Norway, the country set up a commission to investigate the “problem.” Ultimately, the majority of the wealth created by energy ended up in a trust for the benefit of all Norwegians.

I’m not naïve enough to think this will happen in Louisiana (or anywhere else in the U.S. other than Alaska), but it’s an interesting model. My fear is that we are too far gone to be able to constructively take advantage of our newfound energy wealth. First, given the deep recession, decisions are being made today with a short-sighted outlook. There is not much big picture, visionary thinking going on these days when politicians are trying to plug billion dollar budget holes. Second, because the Haynesville land rush happened so fast, the proverbial horse is out of the barn. Most of the good land prospective for the Haynesville Shale and the Middle Bossier Shale (which is just above the southern part of the Haynesville) has been leased and will be drilled so that it will be held by production. There are a few spots with un-leased land and a small percentage of leases will not be drilled before expiring, but the vast majority of productive land has been tied up for generations to come. Many people got raw deals, others got no deals. Unfortunately there are no do-overs.

One thing that deserves mention is the fact that it was an entirely Louisiana production, with nearly every aspect involving home grown talent and resources. I guess it’s more jobs and economic development created by the Haynesville Shale. The next trick is finding a screening of the movie. From New Orleans, it’s off to Europe for film festivals and special events. Hopefully it will get funding and support for a wider release. Sign up at the website (http://www.haynesvillemovie.com/) for updates.

Kudos to everyone involved in this independent film. I would recommend it to everyone, whether or not they have any interest in the Haynesville Shale or the energy industry.

I don’t didn’t want to take away from the discussion of the “Haynesville” movie, but I had to say something about the some of the inane audience questions from the panel discussion following the screening. Clearly, many people just don’t get it (or maybe it’s just the clueless people who need to raise their hands and spout off in public). This is not the fault of the film, however, but a comment on the complexity of energy and the misinformation that abounds.

One audience member in particular stands out. The man, a self-professed libertarian with a taste for “small government,” couldn’t understand why the state of Louisiana auctioned off leases for state owned land to drilling companies. He believed that the state itself should produce the fields and build the infrastructure, sort of a nationalized energy company. The panel was a bit dumfounded at the suggestion. I ended up in a conversation with the man after the screening. He told me that the state should also build pipeline infrastructure for everyone’s benefit and then put a high tax on gas production to encourage production (encourage?). He may have been off the wall, but I can’t help but wonder how many people are this misguided.

I also had to wonder how a self-declared Libertarian could advocate for the government producing its own gas, building pipelines for the benefit of producers and taxing gas at a high rate. Somewhere in Texas Ron Paul is violently convulsing.

Monday, October 26, 2009

In advance of its earnings release next week, Chesapeake released some general operating information today. First it noted that the company's joint venture with Plains is now producing 500 MMcf/day from its 125 Haynesville wells. Chesapeake said that it took five times more wells to get to the 500 MMcf/day level in the Barnett Shale. Impressive.

[UPDATED 10/29/09]Congressional Natural Gas Caucuses have finally been created. The House caucus, which was formed last month and the group's first meeting starred T. Boone Pickens, of the Pickens Plan fame. The group was launched by Reps. Dan Boren (OK) and Tim Murphy (PA) and its current roster of 45 members is bipartisan in makeup, mostly from states with a strong interest in natural gas. North Louisiana Rep. John Fleming is a member. Here are good articles from the Shreveport Times and Pittsburgh Post-Gazette about the group's first meeting. Since there are 32 states that produce gas, the natgas caucus might have a strong voice if its members are well motivated.

The Senate Natural Gas Caucus was formed by Louisiana's own Sen. Mary Landrieu and Georgia Sen. Saxby Chambliss this week. (Kudos to my Sen. Landrieu for leading the effort and for encouraging bipartisan participation.)

The formation of Congressional caucuses is an important step in having a voice in Washington (or at least having someone to listen to you). It is especially vital because there has been an active Coal Caucus for years. I've noted the lobbyist's mantra before and it's never more true than it is today: "if you're not at the table, you're on the menu." Welcome to the table natural gas. Now let's see if you can get the waiter's attention.

Friday, October 23, 2009

I'm working my way through last week's articles after a busy week at my day job. I noticed an interesting piece in the New York Times from last Sunday discussing the various factions among the various energy industry players as it relates to the energy/climate legislation.

I've already noticed that the coal/gas/alt energy ads on TV have started to take over for shrill ads for the various health care factions (hopefully they are all out of ad money). I'd love to believe that the energy debate will be more civil, but given what's at stake I expect an ugly, bloody fight with lots of fearmongering one one hand and false sweetness on the other. It probably won't spill out into the streets, but it should make an otherwise delightful autumn somewhat painful.

The Baker Hughes weekly rig count revealed little change, as the U.S. count increased by eight and the Haynesville area count (E. TX and N. LA - inclusive of other fields) dropped by one, staying even in Louisiana and decreasing by one in Texas.

In terms of national mix, oil rigs increased by three, gas rigs increased by four and miscellaneous rigs increased by one. By rig type, horizontal rigs increased by seven, vertical increased by three and directional decreased by one.

In poking around the Baker Hughes web site, I noticed some interesting data, summarized on the chart below. It shows natural gas production from vertical, horizontal and directional wells for the past three and a half years. It's no secret that horizontal drilling is the new big thing and production in this area has increased, but what I found interesting (but not surprising) is that with the falloff in gas prices and rig count in September 2008, vertical drilling fell off a cliff and has stayed flat since. Same for directional drilling, although to a lesser degree. Horizontal wells declined but have started to pick up over the past few months. Horizontal production now represents 51% of all U.S. production.

Thursday, October 22, 2009

The Henry Hub spot price of natural gas jumped another 20 cents, or 4.2%, to $4.99/MMBtu. What's interesting is that it is now two cents higher than the front month futures price. It's amazing to see the quick recovery in the spot price from lows earlier this month.

Will it hold? If history is a guide, the spot price should move closer to, but stay just below, the front month futures price. The December 2009 contract is now trading at $5.64 and the move to the next contract will take place towards the end of next week. Stay tuned.

This week's EIA natural gas in storage number increased 18 Bcf, or 0.5%, to 3.734 Tcf. The 18 Bcf injection is considerably lower than the injections for the past month, which have averaged in the mid-60's. This is not unexpected given the cooler weather across the nation and the fact that injections normally slow around this time of year, but it is good news in terms of stabilizing gas prices.

The divergence of gas in storage this year compared to recent history has narrowed again this week. Compared to the storage number this week last year, the percentage difference decreased to 11.9% from last week's figure of 13.8%. Compared to the five year average, the number decreased to 13.1% from last week's figure of 14.6%. The chart below shows this year's figure (red line) compared to the five year average (shaded band)

Wednesday, October 21, 2009

The Henry Hub spot price for natural gas rose another 19 cents, or 4.1%, to $4.79. With a slight drop in the futures price, the spread between the two is starting to narrow.

Normally, the spot price trades fairly close, but a little below, the NYMEX futures price, which represents the "front month" futures price (i.e. today - Oct. 21 - it's the November 2009 contract). I looked at the differential between the two since June 1, 2009. Starting in late August, the spread started to grow. It went crazy in late September with a sharp drop in the spot price and a steep jump in the futures price when the October contract was switched for the much higher priced November contract. But as the table shows below, the spot price is fighting back. The spread is still around 57 cents, but it got as high as $2.39 on October 2.

The Shreveport Times reported today about the development of a facility for the manufacture of proppant to be used in horizontal drilling. The company, Patriot Proppant, is a start up that will base its operations at the site in the South Webster Industrial Park. The company expects the product to be used in the Haynesville Shale as well as other drilling operations across the country.

While the company's financial investment in the site was not disclosed, it is estimated to be in the tens of millions of dollars. The facility will employ 30 skilled employees drawn from the local area and will have a payroll of approximately $1.3 million.

This is a good example of economic development related to the Haynesville Shale.

Tuesday, October 20, 2009

El Paso released a good presentation featuring its Haynesville activities. I'll report on it in pieces, but I wanted to note five recent Louisiana completions that haven't made SONRIS yet. All of these are in DeSoto Parish and these are self-reported 30 day initial production rates:

She loves me so far this week. By she, of course I'm referring to the Henry Hub spot price for natural gas. She was up a whopping 42 cents, or 10%, today to $4.60/MMBtu. This price represents an increase of 98% from the close on Friday October 2, just 12 trading days ago.

Looking at the futures market, the November futures price was up 7% to $5.17/MMBtu and the December 2009 futures price now stands at $5.92/MMBtu.

Monday, October 19, 2009

Michigan became the 19th state to limit mercury emissions from coal-fired power plants. The state's Department of Environmental Quality enacted rules to cut mercury emissions by 90% by 2015. Michigan gets 60% of its electric power from coal-fired plants, and coal-fired plants are the largest sources of mercury pollution in the country.

Mercury is a powerful neurotoxin, really bad stuff. Right now, coal plant emissions are only regulated at the state level. I'm a big believer in states' rights, but for something as serious as mercury, shouldn't we have a real federal policy? All this talk about regulating carbon has taken the federal government's focus away from the really bad pollution in coal emissions. I definitely want to lower our nation's carbon footprint, but I damn sure want to get rid of the mercury in the air.

You know... the easiest way to bring mercury emissions to zero would be by burning natural gas for electricity, but nobody asked me.

GMX provided an operational update lite this evening, but the big news was reported last week when the company traded 40% of its gathering pipeline to Kinder Morgan for enough dough ($36 million) to engage a second rig to drill the Haynesville Shale. GMX expects to expand its 2009 capital expenditures from $157 million to $175 million, and not just by transposing the last two numbers, but by spending the Kinder Morgan proceeds (presumably).

What is interesting in today's report is that the company hopes to expand its rig count from two to four in 2010. Preliminary estimates of 2010 capex are $180 million if the company runs three rigs and $220 if it runs four.

GMX also said that results of operating wells with greater than 4,000 foot laterals (seven wells of the eleven Haynesville wells) generally affirm the company's Haynesville decline curve and its estimated ultimate recovery (EUR) estimate of between 5. 4 and 6.5 Bcf per well.

Because of the strained drinking water aquifers in the region, the state of Louisiana has encouraged producers to seek alternative water sources for the several million gallons or so it requires to frack a well. Land owners, sensing an opportunity, have paid contractors to dig ponds to collect water to sell to producers. Other, more fortunate, landowners with existing ponds don't have to go to the expense to build ponds. The market rate for water seems to be somewhere between 25 cents/barrel and the 46 to 55 cents/barrel it would cost to truck it in. (I'm assuming a barrel is 55 gallons.)

I love America. Got a problem? Let's figure out a solution and we'll both profit.

Today the Henry Hub spot price increased 7%, or 27 cents, to $4.18. The price hasn't been this high since May 11, 2009 and hasn't been this high on a sustained basis since mid-February 2009. Of course, by saying it, I've just jinxed it into a vicious swoon, but I couldn't let it go unmentioned.

Sunday, October 18, 2009

Last week Comstock Resources released an operational update detailing seven new Haynesville completions that haven’t hit SONRIS yet. I’m a little late publishing this because I wanted to try to tie it in with DNR data as much as possible.

BSMC LA 17 HZ #1: 10.3 MMcf/day IP; Benson Field, DeSoto Parish, Sec. 5/Township 10/Range 14; serial #239496 (Comstock reported this in the North Toledo Bend Field, but I used SONRIS’s field name to be consistent)

Last week, GMX Resources announced that it had sold 40% of its gathering and compression business to Kinder Morgan Energy Partners, LP for $36 million. The proceeds will be used to fund a new rig (a FlexRig 3 from Helmerich & Payne) to drill in the Haynesville Shale and Cotton Valley Sands in east Texas.

The transaction involves gathering infrastructure from 130 wells, representing 120 miles of pipe and 22,500 hp of owned compression. GMX's subsidiary Endeavor Pipeline, Inc. will continue to operate the system. The transaction did not include salt water disposal assets or other poly pipelines.

Friday, October 16, 2009

The Baker Hughes weekly rig count revealed little change from the previous week. For the U.S. the count was down one well to 1,040. In terms of type, vertical rigs were down three and horizontal rigs were up two. By target, oil rigs were up four and gas rigs were down five.

In the Haynesville region of east Texas and north Louisiana, the count dropped by one, that rig being in Louisiana, to 152. The north Louisiana rig count still represents 15.0% of the total gas rigs deployed in the U.S.

Chesapeake Energy held its annual investment analyst meeting on Wednesday, and I’m going to report on it in segments because there was lots of great information and I don’t want it to be overwhelming to the reader (also, it is taking me several days to go through the seven hour, 192 page presentation).

Much of the presentation updated existing information, but the new data relevant to the Haynesville Shale was the update on the Bossier Shale. There is some confusion about the nomenclature. In this context, Chesapeake is talking about the Mid-Bossier Shale, the formation directly above the Haynesville Shale. For simplicity, I’ll just refer to it as the Bossier Shale today.As the map below illustrates, the Bossier Shale overlays the southern portion of the Haynesville Shale. In Texas, it covers east Nacogdoches, north San Augustine and south Shelby Counties, while in Louisiana it covers south DeSoto, south Red River, north Sabine and northwest Natchitoches Parishes. The two slides below illustrate the overlap of the two plays and Chesapeake’s acreage (yellow is leased acreage, blue is now held by production).

Chesapeake leases approximately 175,000 net acres in the Haynesville/Bossier overlap and recently completed its first well, the Blackstone 26 H-1, which had peak 24 hour production of 9.4 MMcf/day. For the first thirty days, it produced 8.1 MMcf/day. The company’s second well, Muench 10-1 is expected to be better than the Blackstone. Most companies are not in a hurry to develop Bossier wells because the formation is closer to the surface than the Haynesville formation. Once they produce from the Haynesville Shale, they will hold the Bossier Shale by production (HBP).

In terms of geology, the Bossier Shale came about 140 million years ago, 10 million years after the Haynesville Shale. It is a smaller region because the same factors that led to the deposit of organic material that formed the Haynesville Shale were in place to a lesser degree in a more southerly location.

In terms of petrophysical characteristics (see table below), the Haynesville and Bossier Shales are very similar. The main difference is that there is a higher clay content and therefore higher water content in the Bossier Shale. This means that the gas in place is slightly lower and that the estimated ultimate recovery (EUR) amount is lower. Chesapeake currently estimates the Bossier Shale EUR to be 5.5 Bcfe (range: 3.5 - 7.5 Bcfe), which is lower than the Haynesville EUR of 6.5 Bcfe (range: 4.5 - 8.5 Bcfe). Because of the lack of production data, it is probably too early to hang your hat on the Bossier EUR.

I’ve noted several news articles focusing with disappointment on the revelation that the Bossier EUR will be lower than the Haynesville EUR, but I don’t think a lot of companies are going to shed tears over a 5.5 EUR play that is mostly HBP.

Thursday, October 15, 2009

There was a good article last week in Business Week about natural gas and how its emergence has changed the business landscape, especially for utilities. In particular, the article focused on increased use of natural gas in power generation, both as a replacement for coal and as a complement to alternative energy sources.

The article noted a couple of utilities that opted to upgrade existing coal plants to natural gas. I like the concept, but a big part of the logic behind the decision is the belief that natural gas prices will be relatively low for the next decade. Big shale plays like the Haynesville should be able to survive and thrive in that price environment, but it might take a significant toll on conventional drilling, formerly the backbone of the industry that still supports legions of small independent producers that created today’s domestic natural gas industry.

With the emergence of shale gas, the gas industry is undergoing significant changes. An industry once populated with scores of small producers is now dominated by a few very large producers. It will be interesting to see how the little guys fare over the next decade.

Chesapeake Energy had its investment analyst day yesterday. The associated presentation (here is the link) is mammoth (192 pages) and filled with lots of goodies. I'm a bit swamped right now with my day job, but I intend to digest it and report on it in the next couple of days.

The EIA natural gas in storage number was released this morning. It showed a 58 Bcf injection, bringing the total gas in storage to 3.716 Tcf. The storage injection is 11 Bcf lower than last week's injection and 21 Bcf lower than the rate the second week of October last year.

This week's storage number is 13.8% higher than last year's number (last week it was 14.9% higher) and 14.6% higher than the five year trailing average (last week it was 15.1% higher). It's still trending in the right direction, but the biggest unknown is when injections will stop. Since there is little consistency in this date (it has ranged from the third week of October to the third week of November in the past five years), it's still white-knuckle-hold-on-tight time.

Tuesday, October 13, 2009

While I don't think compressed natural gas (CNG) will be the biggest new demand driver for natural gas over the next decade, I do think it will be a strong component to further the general growth of the fuel. It is especially important because it is cleaner and cheaper than oil-based fuels and is a domestic product that will improve national security by helping wean our nation off foreign oil. Here are some news snippets about CNG (the first two are not new news, but they are big):

AT&T announced plans in March 2009 to deploy 8,000 CNG service vehicles over the next ten years. In total, the company will deploy a total of 15,000 alternative fuel vehicles.

UPS added 300 new CNG delivery vans to its fleet in February 2009. With the additions, the company now has a total of 1,891 alternative fuel delivery trucks, approximately 1,100 of which are CNG. The new CNG trucks are located in California (111), Oklahoma City (100), Atlanta (46) and Denver (43).

The Dallas Area Rapid Transit (DART) is considering buying 594 new compressed natural gas (CNG) buses to replace a portion of its aging fleet and building three new CNG fueling stations. The article linked above gives the political back and forth that reminded me, chillingly, of a few years I spent as a consultant to a quasi-dysfunctional municipal board, but the point is that another city in the heart of gas country looks to be supporting natural gas with action rather than words.

Phoenix Beverages, a New York Budweiser distributor, is planning to convert 20 of its 150 fleet delivery trucks to CNG with grant help from Clean Cities, a DOE public-private partnership to reduce petroleum consumption. The funding came from the federal stimulus package approved earlier this year. The number of trucks converted is not a huge number, but it's exactly the kind of project that helps seed CNG. You build a few CNG stations and early adapters can buy CNG vehicles. That supports more stations, which supports more vehicles, and so on and so on.

The Louisiana Office of Conservation enacted rules effective October 1, 2009 requiring drillers to report very specific information about the source of water for each new gas well. While these rules result from the growth of the Haynesville Shale and the large water requirements for hydraulic fracturing, they presumably impact any well using fracking.

The rules call for producers to identify the source of the water used, be it from an aquifer, pond, river or other source, and note the quantity of water used.

Also being considered is a three parish (Caddo, Bossier and DeSoto) study of aquifer water quality through approximately 1,000 water wells. The study hasn't been approved by all three parishes, but given the risk to the drinking water aquifers, a baseline study would be money well spent by local governments. If approved it likely would take place in 2010.

It doesn't sound like much, but in the information age, the reporting of detailed data allows the people who actively follow an issue to be better informed. It also puts producer on notice that they are being watched, both by the government and interested citizens.

I've been reading a great deal about the Marcellus Shale lately, and people are going nuts over the water quality issue. There is a great deal of fear about fracking and the potential environmental damage. The battles are being fought at the local level in numerous communities, especially in Pennsylvania and New York. The issue might delay shale gas development in certain areas for a while. It's kind of ironic to hear the hew and cry from Pennsylvania, one of the top three states in terms of active gas wells and the state where oil and gas drilling first started 150 years ago.

Thanks to a reader's tip last week (although I'm just getting to it today), I watched a piece on 60 Minutes about coal ash. The story is a follow-up to a huge spill of coal ash from a Tennessee Valley Authority coal-fired power plant in Kingston, TN in December 2008. A wall of a retention pond broke and approximately one billion gallons of coal ash-infused water flowed down the Emory River creating a huge toxic mess.

The vast volume of coal ash creates a disposal problem. Clearly storing massive quantities is not a great solution as the folks downriver of Kingston found out. The 60 Minutes story delves into a golf course that used recycled coal ash in its construction and the class lawsuits that have followed. Coal ash disposal is regulated on a state-by-state basis. One of the unanswered questions is whether or not the EPA will step in and create federal guidelines for the disposal and/or designate coal ash a toxic waste product. Given the coal lobby's strength in Washington, I doubt you'll see it designated as toxic waste, but the is the EPA and not Congress, so there is a chance it will happen.

Generally I find 60 Minutes and similar shows to be a little hysterical and one-sided, but the basic story behind the drama is worth considering. Coal, which generates just under half of the electricity used in our country, is responsible for water pollution and other environmental damage when it is mined, air pollution when it is burned and large quantities of quasi-toxic ash as a physical byproduct. If it weren't for the Kingston accident, the general population never would have heard about coal ash. Great stuff, this coal.

Monday, October 12, 2009

After a couple of weeks of extreme volatility, the Henry Hub spot price was up one penny today to close at $3.95/MMBtu. The front month futures contract is up 11 cents to $4.88/MMBtu. Is the dust settling or are traders just taking a break?

Friday, October 9, 2009

The Henry Hub spot price dropped 31 cents to close at $3.94 after a big up week. While nobody likes to end the week on a down note, the price is still 70% higher than last Friday's close. On the whole, a good week for gas.

The Baker Hughes rig count showed a national increase of 17 rigs, bumping up the number of operating rigs to 1,041. It should be no surprise that the increase was driven by horizontal drilling rigs (+19) at the expense of vertical rigs (-2). What might be a little surprising, given commodity prices, is that gas rigs (+14) saw the biggest increase.

But the above shouldn't be a surprise looking at the large increase in Haynesville area rigs. The Haynesville area, which includes some other formations, was up by nine rigs, all in north Louisiana, to 153. With this surge, North Louisiana now represents 15.0% of all U.S. gas rigs, up from 14.0% last week.

Thursday, October 8, 2009

In my quest to find Wi-Fi (I'm still on the road), I came up with seven (and counting) ways to start this post, but none seemed to convey the shock/amazement/joy/fear, etc. that I felt in seeing the Henry Hub spot price for natural gas on my phone this afternoon. The price jumped another 15% to $4.25.

To put this in context, last Friday the price was $2.32. That's an 83% increase in six days. If you had somehow been able to buy gas on the spot market at Friday's close and sell it at today's close that would be a time weighted return of 984,330,241,730,150,000%. That would have been a good investment.

With the release of the storage numbers today, I think the market has figured out that we will not run out of storage space. The injections for the past month have been in the mid-60's (Bcfs) and there will probably be enough capacity before the withdrawals begin. The spread between the front month futures price and the spot price has narrowed to about 17%. By comparison, it stood at 130% last Friday.

In case you're wondering, the spot price hasn't been this high since May 12, 2009, and that was only for a single day. The price hasn't been sustainably above $4.25 since mid-February 2009. Just in case you think this is an indication we're "Goin' to 10!" I'd hold off on the celebration. The price likely won't exceed the front month futures price, which is currently trading around $4.96. The December contract is trading around $5.77 and the January 2010 contract is about $6.07.

I’ve been on the road this week, as my lack of consistent posts indicates, and I spent a couple of days in coal country. I flew from Memphis to Pittsburgh and the pilot took the plane up the Ohio River. It was a beautiful stretch, but I was particularly struck by how many coal-fired power plants lined the river. This is no surprise because Kentucky and Ohio are big time coal country. I believe next door to most of them were natural gas fired-plants. I make this assumption because the coal plants were belching white smoke while the (presumably) natgas plants were quiet. This makes sense in the shoulder season when electricity demand is relatively low.

As I watched a plume of smoke turn into a cloud that floated over the river, I thought of the chemicals in that cloud and how I wouldn’t want that cloud to hover over my house (or the source for my drinking water). I briefly envisioned a world without coal-powered electricity but realized that would never come to fruition. (As I’ve said before, I believe in a “portfolio solution” to our energy future where many fuels power the future, but sometimes I get a little rah-rah about natural gas at the expense of coal.)

Today I found myself reading Metropolis Magazine, a design mag targeting architects. There was an interesting article about a former coal-fired plant in South Africa that had been turned into office and public space. It got me thinking about all of those plants I saw with those wonderful river views. Sure they will be horrific brownfield sites if they are shut down, but they sure would make great adaptive reuses into office, retail, residential and public spaces.

The weekly EIA gas in storage number was released this morning. It went up 69 Bcf, or 1.9%, to 3.658 Tcf. Another week, another record. Ho-hum. The variance over last year (14.9% this week vs. 15.8% last week) and the five year trailing average (15.1% vs. 15.5%) continue to narrow slightly.

The above additions and changes are reflected on the lists of Louisiana completions. I also went back and updated some completion dates and other data gaps for wells for which I previously reported partial information.

The Henry Hub gas spot price jumped another 49 cents, or 15.3%, to $3.69. While that’s still lower than I’d like, it’s a helluva lot better than last Friday’s close of $2.32. I’d love to believe the “V shaped recovery” will continue, but I think we likely are in for another plunge and spike.

Monday, October 5, 2009

Arthur Berman published a post this weekend (also an article in World Oil magazine) updating his thoughts on the economic potential of the Haynesville Shale. In the past, I've noted a couple of articles by Mr. Berman and a critical response to his work. The occasion for the most recent article was the Gulf Coast Association of Geological Societies meeting in Shreveport in late September that focused on the Haynesville Shale.

Mr. Berman's contention is that the steep decline rates lead to low estimated ultimate recoveries (EUR) and that the type curves projected by the producers are too optimistic. Ultimately, he contends, producers are overstating their reserves. That's a big no-no, as a few companies found out a few years ago. This position stands in direct opposition to the published reports by producers, which are sticking with their curves and EUR estimates (and of course their reserve estimates). Who is right? I'd love to know.

The post is filled with technical information that mostly is over my head, but it is still worth reading. It also includes brief summaries of some of the good technical presentatioins made at the recent symposium.

Just as I begin to recover from the big hit the Henry Hub spot price took on Friday, I see today that it has jumped 23% (54 cents) to $2.86/MMBtu. As of this writing, the November gas futures price is up 6% to $4.99, so it looks like a good day all around.

Imagine as a royalty owner opening the Saturday Wall Street Journal and seeing the headline, "Natural Gas Rises 5.6% Despite Record Supply." You'd feel alright about a price of $4.718/MMBtu, huh? If you then look in your local paper which reports the Henry Hub spot price for gas (as mine does) and see the price of $2.32/MMBtu. You'd spit out your Cheerios.

Get used to that sensation. October will be a hellish month if you are dependent on the spot or wellhead price of gas. The storage situation is going to make life rough. Because storage in the Producing Region is just about full, it makes the logistics of moving gas a little more difficult. I've also read that some storage companies are starting to decline new gas, holding a few spots for later injections. It must be a terrible feeling for a producer to be denied storage - sort of like being at a restaurant when the maitre d' telling you to keep waiting when you see empty tables.

I noted two new Texas completions this weekend, although one is just a revision of earlier data:

Holt 1H, GMX Resources: 9.57 MMcf/day initial production on 26/64" choke; North Carthage Field, Harrison Co. (Bossier Shale). This well was reported by GMX around August 10 of this year with slightly different stats. This information what the company reported to the Texas Railroad Commission.

Garret Heirs #3, Valence Operating: 1.481 MMcf/day on 14/64" choke; North Carthage Field, Harrison Co. (Bossier Shale). Based on its drilling depth, I believe this is a vertical well.

Friday, October 2, 2009

Or “Thud!” Whichever word you choose, the 20.5% plunge in the Henry Hub natural gas spot price made an awful sound. The spot price dropped 60 cents to $2.32. This appears to be an indication that the storage issue, at least storage in key places, will absolutely kill prices until the winter heating season begins. Interestingly, the November futures contract closed up 5.5% at $4.71, so this hopefully will be a temporary problem.

I've read some articles with people saying that gas could go to zero until the storage issue is resolved. I don't think that will happen. If gas is super cheap for a month, it will be snapped up by electricity producers. They will turn down their coal plants and burn lots of cheap gas. That should keep it above zero. Where the equilibrium lies, I don't know, but I suspect it is below $2.32, so buckle up tight and don't expect big royalty checks in January when your Christmas credit card bills arrive.

Man, I wish I had the wherewithal to buy lots of natural gas at $2.32 today and then sell it on October 29 (the day the November contract expires) for $4.71. That quick doubling of your money would imply an internal rate of return of 1,436,677%! Of course, you’d have to find some place to store that gas for a month.

Before I delve into this, I have to say that I'm in a minor quandary. There seems to be no consensus as to how one should spell the gerund version of the short name of hydraulic fracturing. Is it fracing? Or fracking? I've even seen fraccing. I've used "fracing" somewhat consistently, but now I think I'm going to switch to "fracking" because it just looks better. Also "fracing" looks like you might pronounce it "frace-ing." I wrote a paper on Muammar Qaddafi in high school and realized that there are more than a dozen spellings of his name. At least this is less complicated. Declaration complete, back to business...

I've been reading a lot about concerns that many people have about fracking. Because a very small percentage of the content of the frac water has scary sounding chemicals, many people, both landowners and environmental-types, have objected to the fact that the process is not regulated. The fear is that the chemicals will leak into groundwater.

If you believe the hyperactive environmentalists, you will think carcinogens are being pumped by the truckload underground. If you believe the industry-types, you will think that the chemical contents are no different than those in household products.

The "Energy in Depth" web site has a good section on fracking. (Note that EID is an industry site, so it has a bias, but it does present the facts well.) It goes into depth on the specific details of fracking, and one of the components is the graphic on the right, which breaks down the contents of most fracking fluid.

There was a good (long) article in yesterday's New York Times on the subject of fracking and the proposed statewide legislation concerning gas drilling in New York. The state of New York has been under the most pressure to regulate anything and everything concerning ground water in anticipation of wells for the Marcellus Shale being drilled there. The Holy Grail is the watershed for New York City, which is a large portion of upstate New York. It will be well protected.

I noted in a post on Tuesday that several producers are calling for greater transparency about the proprietary contents of frac water. I thought about that some more. It's easy for the producers to call for transparency. It's not their products that are proprietary. The producers may not want to admit their own secret sauce, but that's much more involved than the frac water and includes completion design, type and quantity of proppant, etc. They look like heroes calling for their suppliers to be more forthcoming.

As I've said in the past, the risk from fracking comes at the surface. All contamination accidents that I've heard involve surface spills. I think greater transparency on the issue will help the industry, but so will the recognition that the handling of the materials is the real issue.

Thursday, October 1, 2009

The market did not like natural gas today. The Henry Hub spot price went down 36 cents to $2.92, a drop of 11%. The gas storage numbers keep going up, the dollar is getting stronger and several economic indicators of business activity went down slightly.

I've been asked several times why I follow the Henry Hub spot price. What most people see and hear quoted is the front month NYMEX futures price (today: down 7.7% to $4.47). Futures prices are an easy number to quote because futures contracts are actively traded and their prices are reported in real time. Henry Hub prices are usually only reported once per day in the late afternoon.

I look at the spot price because I believe it is a good proxy for wellhead price, on which royalties are based. I looked at monthly information from the Energy Information Agency from January 2008 to compile the chart below, which shows that the Henry Hub spot price is pretty well correlated with wellhead prices, especially over the past 14 months.

The all important natural gas in storage figure was released by the Energy Information Agency this morning. It showed a 64 Bcf increase in storage, pushing the gas in storage number to 3.589 Tcf. The 64 Bcf injection is less than one normally sees at this time of year, which caused the spread between this year and last year to narrow from a 16.9% overage to 15.8%. The spread over the five year average dropped from 16.0% to 15.5%. The chart below shows the current storage level (red line) versus the five year average (shaded band).

While it's good to see these spreads narrow, we are still looking at a storage level at an all-time high, and it is still possible that storage might fill up before the end of the month. The overall storage capacity is a theoretical number because storage facilities consist of salt domes and retired oil fields in addition to pipelines and tanks. The biggest concern is that the storage in the Producing Region will fill up first. This might make transportation to other regions difficult and effectively stop production. As the chart below shows, storage in the Producing Region is 30.3% higher than the five year average.

It is encouraging to see less gas going into storage than usual. This is a result of less gas being produced because of fewer drilling rigs working and completions being delayed as well as voluntary curtailments. Gas production in every state but Louisiana was down for the month. In Louisiana it was up 14%((!).

The lower storage injection is also the result of more gas being used in electricity production. I recently read a report that showed gas at these prices is more economical than coal to burn for electricity, which has led to some switching. The increased use in electrical power is helping make up for the significant decrease in industrial gas use, which is down 19% YTD. The chart below shows the industrial gas use versus the five year average.

Going forward, there is going to have to be a lot of switching given the gas industry's newfound ability to produce prodigious quantities of gas, or else the gas industry constantly will be bumping up against storage constraints, which will keep prices low.

Unfortunately, the gas storage news seems to have put a dent into gas prices today. As of this moment, the "front month" futures contract (November) is down 7.5% to $4.48.

It's Been a Gas...

As of 12/31/15, I have stopped updating the Haynesville Play site on a regular basis. I will occasionally post items I find interesting, but I will no longer maintain the data or keep the news current. The site will remain up as an historical archive and a home for occasional musings.

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About Me

My goal is to compile a real-time historical record of the development of the Haynesville Shale.
There is so much going on at any one time that impacts the Haynesville Shale. I weed through the information and summarize the important points.
I look at the micro-trends, such as drilling results and drilling rig activities, focusing on the who, what and where. I also concentrate on the macro-trends that will impact the future of the Haynesville Shale, including the supply/demand issues, the market for natural gas and trends that impact the gas industry as a whole.